EXPECTED INFLATION IN CANADA 1988-1995 - AN EVALUATION OF BANK-OF-CANADA CREDIBILITY AND THE EFFECT OF INFLATION TARGETS

Between 1988 and 1995 actual inflation in Canada fell while expected i nflation did not fall as rapidly. The Bank of Canada made three attemp ts to signal its policy of lower inflation: a series of speeches from January to June of 1988, the announcement of inflation targets in Febr uary 1991, and the reaffirmation of inflation targets in December 1993 . This paper finds that only the 1988 speeches reduced expected inflat ion. There is considerable evidence that inflation targets were credib le and that the 1993 change in Governor was handled so that expected i nflation both remained within the target range and continued to fall.